The Development Dimension

A series of OECD books analyzing the development aspects of policies in other domains, such as economic, financial, environmental, agricultural or trade policies. By systematically taking the development dimension of member country policies into account, OECD analysis and dialogue can help change behaviour in support of development in an ever more integrated, interdependent global economy.

Succeeding with Trade Reforms: The Role of Aid for Trade highlights the potential of aid for trade to boost economic growth and reduce poverty, while discussing the various reasons why it may not be realised. In so doing, this book draws lessons for the design of aid-for-trade projects and programmes and for increasing their effectiveness. Building on this analysis, the book also quantifies the binding constraints to trade in developing countries and the importance of complementary and compatible policies (such as education, governance, business environment and macroeconomic stability) to maximise the impact of trade reforms on trade and economic growth.

History has shown the important force that international trade can be for economic growth and poverty reduction. Trade can therefore be a major tool in countries’ efforts to reach their development goals. However, particularly in the case of the least developed countries, harnessing the power of trade remains challenging.

Trade can be a powerful engine for economic growth, poverty reduction, and development. However, the growth potential of trade may not always be realised in practice. In some cases trade reforms proved unsustainable and in other cases they did not have a meaningful impact on economic growth. This book discusses various reasons for these outcomes in order to draw lessons for the design of aid for trade and to increase its effectiveness. It describes the "compatible policies" that will make trade reform sustainable and the "complementary policies" that will increase its growth impact. It thus argues that successful aid for trade must tackle a broad range of difficult issues,

In order to show that aid for trade has had an impact and to improve its effectiveness, the OECD has expanded its monitoring activities and supplemented them with work on evaluation and on the binding constraints to trade expansion. This report focuses on the latter work stream, which aims to identify the most binding constraints to trade expansion in order to prioritise reforms and to guide the sequencing and the design of aid-for-trade projects and programmes.

While most trade reforms had a positive impact, some trade reforms proved unsustainable and others did not have a meaningful impact on growth. This chapter discusses the various reasons for these outcomes in order to draw lessons for the design of aid-for-trade projects and programmes and to increase their effectiveness. It argues that aid for trade should not only focus on helping developing countries to turn trade opportunities into trade but also tackle the binding constraints that choke the impact of trade on economic growth. Moreover, it argues that aid for trade can effectively support the compatible policies that make reforms sustainable and the complementary policies that increase the role of trade as an engine of growth.

This chapter quantifies the severity of binding constraints to trade in developing countries. It also quantifies the importance of the complementary policies that will maximise the impact of trade reforms on trade and economic growth. As trade-related needs of developing countries are numerous, such quantification is needed to guide the sequencing of reforms and aid-for-trade support. An econometric analysis is undertaken for as many partner countries as possible to produce a benchmark against which special country groupings can be assessed. The econometric work relies on experimentation to identify and rank (based on their relative severity) the most binding constraints for each country grouping (landlocked countries, small and vulnerable economies, and commodity exporters).

The insights of the econometric work are supplemented by two case studies: Uganda and Azerbaijan. The case studies aim at providing illustrations of the mechanisms highlighted by the econometric work and the importance of some variables that econometric work could not capture because of data limitations.

Empirical literature on trade and growth supports the idea that trade can be an engine for growth and development. But needs in order to expand trade are numerous while political capital and financial resources (including aid for trade) to support reforms will be available only over time. Thus, for trade reforms to be successful and for aid for trade to be effective, it is crucial to sequence appropriately the reforms and to complement them with policies that make these reforms sustainable and increase their impact on growth and poverty reduction. Identifying the most binding constraints is not easy. This book has highlighted those identified by the empirical experience as the most common and provided a quantification of their impact on trade and growth. This exercise shows that the most binding constraints differ across countries although it appears that electricity is a major constraint shared by many countries.

The model used to determine the impact of the variables identified as the binding constraints on trade and, subsequently, the impact of trade on growth is composed of two stages. In the first stage, it quantifies the magnitude and direction of the direct effect of the binding constraints on trade indicators (exports, imports, and openness). In the second stage, the model quantifies the magnitude and direction of the composite effect of the binding constraints on the economy’s growth rate through their effect on trade indicators. This procedure isolates the explained variation in trade accounted for by the binding constraints on the economy’s growth rate by using the Two Stage Least Squares (TSLS) estimator. Contrary to conventional applications of the econometric estimator, in this application, the first stage of the model is equally as important as the second. Therefore, the variables to be included in each stage need to be chosen carefully.